Alas,Bankruptcy Law, We Knew Ye Well - Consequences of Chrysler's 363 Sale
They say that "hard cases make bad law". And that's never been more true than in the current Chrysler (and soon to follow, GM) bankruptcy. In the practice of bankruptcy law, we really do talk a lot about what's "fair and equitable". And having a transaction as complex as that proposed by Chrysler -- or at least the bidding procedures designed to make any other alternative near impossible -- approved in a matter of days seems to me to turn this fundamental underlying value of bankruptcy law and practice on its head.
When I started law school, I had no idea I would become a creditor-oriented bankruptcy lawyer in Central Ohio. Having now been one for more years than a lady cares to count, I've always felt that bankruptcy law was relatively internally consistent in comparison with other areas of law. And it seemed to make sense and strike a balance between debtors and their creditors. Up to now, once you understood the basic fundamental principles, concepts, and underlying values of bankruptcy law and practice, you could often reason your way to what the applicable rule would be even if you couldn't remember the exact statutory provisions. And that has always seemed good to me.
Now, in the name of a perceived (and perhaps, even actual) urgency and expediency, the Chrysler (and soon to be GM) bankruptcy are perverting and destroying that unifying fabric of bankruptcy law. Others have posted on some of the damage being done, most notably Steve Jakubowski of The Bankruptcy Litigation Blog who asks "Will the 'Absolute Priority Rule' Kill the Sale?" and thoughtfully analyzes (and has deservedly received a lot of notice for his post) whether the Chrysler sale is "Testing the Limits of Section 363 Sales"
For me, it is the desecretion of the process of achieving "confirmation" of a "plan of reorganization" that bothers me the most. Instead of requiring this process to play out, Judge Gonzalez appears to be allowing Chrysler to bypass it entirely, thereby corrupting the entire "363 sale" procedure. The"preliminary sale order", and especially the "Bidding Procedures" it approves, are tantamount to a"plan of reorganization", but alleviate Chrysler's need to comply with certain procedures required in that situation.
Why is this bad? Because it essentially wipes out the whole plan confirmation process. I am sure there will be an effort to say that this (and perhaps GM as well if it also goes this route) present unique and special circumstances. And they probably do. However, any business bankruptcy debtor attorney worth his or her salt will now emphatically assert -- as Chrysler's lawyers have -- that there is simply no time to follow the lengthier statutory plan confirmation procedures and that the value of the business is drastically depreciating with every day's delay. They will also insist -- as Chrysler's lawyers have -- that nothing will do but to require any bidders to mark up their proposed Purchase Agreement. It might also encourage to wait to file until it absolutely positively IS that sort of emergency situation.
And perhaps the most tantalizing of all Chrysler's arguments is that bankruptcy is all about the debtor and should be interpreted in whatever way is most likely to keep the debtor from having to liquidate --
in a business reorganization case, among all the other policies served by specific provisions of the Bankruptcy Code, this fundamental objective of preserving the debtor's businss as a going concern is paramount.
Now that's a principal every debtor can get behind and use to justify almost anything.
>>>> How often debtors succeed with these arguments and tactics will make a big difference in the Chapter 11 bankruptcy process for years to come.
- For a more detailed analysis of some things Judge Gonzalez could have done even in the 363 sale context visit "Why the Chrysler Deal Would Horrify a New Dealer" by David Skeel
Once upon a time, a 363 sale was reserved for disposing of certain selected assets. As time went on, it became more common to also use it when selling all of the assets of a company. But it was still mostly, if not entirely, the SALE OF ASSETS, No assumption of leases and contracts or other fancy stuff.
If a debtor wanted to load up a proposed 363 sale with all sorts of bells and whistles -- as Chrysler has -- it had to file a proposed "Plan of Reorganization", accompanied by a "Disclosure Statement", instead, explaining how the plan for exiting bankruptcy would work. Section 1123 of the Bankruptcy Code sets forth what the plan must contain. Section 1125 requires the Disclosure Statement to provide "adequate information" about a plan and its implementation and consequences such that a hypothetical investor would be able "to make an informed judgment about the plan".
Once a proposed plan and Disclosure Statement are filed, Bankruptcy Rule 3017 requires at least 25 days notice of a hearing to determine if the Disclosure Statement is satisfactory. If it is, the plan and Disclosure Statement are circulated to all creditors who then have an opportunity to vote on the plan. For each "class", i.e. grouping, section 1126 requires that creditors holding more than half of the claims in number and at least two-thirds in amount must vote to "accept" the plan. Another 25 days must go by before the "confirmation" hearing can be held. When that day comes, the debtor must deal with any objections to the plan such questions about feasibility and meet the requirements of section 1129 of the Bankruptcy Code. in order to have the plan successfully "confirmed".
Is that a lot of work? You bet! And it's one reason so-called prepackaged bankruptcies (prepacks to those in the biz) became popular as a way to at least cut down on the amount of time.
But what it also does is give those who would be most affected by the debtor's bankruptcy exit plan time and information to evaluate the course advocated by the debtor. It also requires a fairly broad base of support for the debtor's proposal. Unlike a 363 sale in which an 800 pound gorilla like Chrysler and its high powered attorneys can quite literally steamroll over smaller and in this case perhaps not entirely organized yet creditors, the plan confirmation process recognizes and allows these parties more of a chance to participate. Granted, they may still be largely ignored, but at least collectively they do have at least some voice.
It's possible that the sale might still be rejected on these sorts of grounds -- technically a hearing on the Sale Motion itself doesn't occur until May 27 -- but it seems a little silly to allow bidding to move forward only to reject the product of those activites.
American law and society have always recognized the importance of individuals and have many safeguards to protect individual rights. What I fear most is that the legacy of the Chrysler/GM bankruptcies will be a bankruptcy process left in tatters. And somehow less "fair"
